World View & Market Commentary. Forest first; Trees second. Focused on Real & Knowable facts that filter through the "experts" fluff and media hyperbole. Where we've been, what the future may hold and developing a better way forward.

Monday, June 27, 2011

Equity futures are slightly higher this morning with the dollar poking through, but then retreating from the top of the descending wedge it’s been testing. Bonds are flat, oil is lower ($90 range), gold & silver are lower with gold sitting on the $1,500 mark (up slopping support $1,410ish), and most food commodities are lower with corn gapping significantly lower.

Commodities continue to correct with, I think, the perception that QE is about to go away. That perception is not exactly correct, as I pointed out that in the last FOMC minutes they reiterated that they would continue to “reinvest bond principle,” which is just another way of stating that they would continue to print, but not quite as much as before. “Reinvesting bond principle” is a deceptive trick designed to lead you to believe that it’s just a roll-over operation… but that is certainly not true. Normally debt that matures simply goes away, it is retired. Not retiring debt that has matured is exactly the same thing as just creating money from nothing – again, it is just money printing, to use what is now quaint terminology.

Bloomberg actually picked up on this, but of course is not calling it printing as they are nothing but front men for the private “Fed.” Still, there are grains of truth here that should be understood:

The Federal Reserve will remain the biggest buyer of Treasuries, even after the second round of quantitative easing ends this week, as the central bank uses its $2.86 trillion balance sheet to keep interest rates low.

While the $600 billion purchase program, known as QE2, winds down, the Fed said June 22 that it will continue to buy Treasuries with proceeds from the maturing debt it currently owns. That could mean purchases of as much as $300 billion of government debt over the next 12 months without adding money to the financial system.

The central bank, which injected $2.3 trillion into the financial system after the collapse of Lehman Brothers Holdings Inc. in September 2008, will continue buying Treasuries to keep market rates down as the economy slows. The purchases are supporting demand at bond auctions while President Barack Obama and Republicans in Congress struggle to close the gap between federal spending and income by between $2 trillion and $4 trillion.

“I don’t think the Fed wants to remove accommodation in any way, shape or form,” said Matt Toms, the head of U.S. public fixed-income investments at Atlanta-based ING Investment Management, which oversees more than $500 billion. “It’s quite natural for them to reinvest cash,” he said. “That effectively maintains the accommodative stance.”

Still, this is significantly less accommodation than the continual growth in balance sheet debt that has been occurring. I don’t think they can just let the status quo be, they must continue to grow the numbers or the forces of deflation will quickly take over – you can already see that in commodities and especially in the financials where the rotting insolvency continues to fester.

That rot is clearly seen in the charts. Below is the XLF which on Friday produced a “Death Cross” with the 50dma crossing below the 200dma. Not only that, but the upper Bollinger band is in the same location as the cross – that will provide serious overhead on the next rally attempt:

The $BKX Index is even worse, it produced a Death Cross about a week ago. Both of these crosses have largely gone unnoticed, but have significant implications for the broad market:

The disconnect between warning signs like those and the pumping in the mainstream has never been bigger. CNN published an article with a chart (I won’t show) projecting future stock price possibilities that were higher, way higher, and only slightly lower – of course completely ignoring where stocks would be if even a small portion of the graft were removed. And on Bloomberg it’s all about “analysts” moving their revenue projections up next year, as if never ending growth will never end. Of course the weight of exponential math ensures that it will end.

The Economic Calendar is fairly light this week with Consumer Confidence tomorrow, the Manufacturing ISM and Construction Spending on Friday. I’m sure that falling oil prices may boost Confidence which is exactly the ploy in releasing oil from the strategic reserves – purely political, but there are many potential consequences to irrational actions like this. Zero Hedge did a piece on those potential consequences, it’s worth a read: As The IEA-OPEC Nash Equilibrium Collapses, Is A 1973-Style OPEC Embargo Next?

Personal Income and Outlays were reported this morning and it was softer than expected pretty much all the way around. Incomes supposedly grew .3% in May, but that was below consensus and April’s number was also revised lower. Of course prices were higher against Consumer Spending that was 0.0, flat, month to month despite all the money debasing, which shows you how quickly deflationary forces can move back in – still, it’s only one month’s number and year over year is still up, but is decelerating from the prior month. Again, these numbers are in no way “real,” as measuring in a devalued currency produces apparent growth, not real growth. And when you monkey with the statistics, you have little real information to go on – thus $1,500 for gold doesn’t seem like such a stretch, does it? Here’s Econospin on the numbers:

Highlights
In May, income growth was moderate but spending was flat largely on a dip in auto sales with gasoline appearing to also weigh down. Inflation news is mixed. Personal income in May rose 0.3 percent, matching the gain the month before. The latest figure came in lower than analysts' expectation for a 0.4 percent advance. Wages & salaries increased a modest percent, following a rise of 0.4 percent in April. This component was softened by no change in the government subcomponent.

Personal spending weakened in May, posting at no change, following a 0.3 percent boost the prior month. The median market forecast called for no change. By components, durables dropped 1.5 percent after no change in April. Nondurables dipped 0.3 percent, following a 0.2 percent rise the month before. Services gained 0.2 percent, following a 0.1 percent slip in April. Within PCEs, the drop in durables likely was related to shortages of autos dependent upon Japanese parts. The nondurables dip probably was due in large part to a decline in gasoline prices.

On the inflation front, the headline PCE price index eased to a 0.2 percent rise from 0.3 percent in April. However, the core rate edged up to 0.3 percent from 0.2 percent in April. The consensus projected a 0.2 percent rise for the core for the latest month.

On a year-ago basis, headline PCE inflation rose to 2.5 percent from 2.2 percent in April. Core PCE price inflation firmed to 1.2 percent on a year-ago basis from 1.1 percent in April.

Year on year, personal income growth for May printed at 4.2 percent, compared to 4.4 percent the month before. PCEs growth rose a year-ago 4.7 percent, down from 4.8 percent the prior month.

Today's personal income report adds to the "soft patch" scenario. Income is still growing but not at a strong enough pace for the latest month. And spending is flat. However, there are arguments that the softness is transitory. Improvement in employment would boost income. An easing of supply disruptions in the auto sector will likely lead a rise in durables spending. However, nondurables will likely weighed down by additional near-term declines in gasoline prices.

Waves of inflation and deflation as the deflationary forces of debt saturation fight against a determined private group of narcissist bankers hell bent on creating inflation to keep their Ferraris out of the repossessor’s hands.